Solving for unknowns: cost-volume-profit and budget analysis (adapted from a problem by D. O. Green). A partial income statement of Dell Corporation for Year 0 follows. The company uses just-in-time inventory, so production each year equals sales. Each dollar of finished product produced in Year 0 contained $.50 of direct materials.

$0.33 { o f direct labor, and $0.16 ^ o f overhead costs. During Year 0, fixed overhead costs were $40,000. No changes in production methods or credit policies are anticipated for Year I .

Management has estimated the following changes for Year 1 :
■ 30 percent increase in number of units sold ■ 20 percent increase in unit cost of materials ■ 15 percent increase in direct labor cost per unit ■ 10 percent increase in variable overhead cost per unit ■ 5 percent increase in fixed overhead costs ■ 8 percent increase in selling costs because of increased volume ■ 6 percent increase in administrative costs arising solely because of increased wages There are no other changes.

a. What must the unit sales price be in Year 1 for Dell Corporation to earn a $200,000 operating profit?

b. What will be the Year 1 operating profit if selling prices are increased as before, but unit sales increase by 10 percent rather than 30 percent? (Selling costs would go up by only one-third of the amount projected previously.)

c. If selling price in Year 1 remains at $10 per unit, how many units must be sold in Year 1 for the operating profit to be $200,000?

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DELL CORPORATION Partial Income Statement for Year O Sales (100,000 units at $10) Cost of Goods Sold. Gross Margin Selling Costs.. Administrative Costs. Operating Profit... $150,000 $1,000,000 600.000 $ 400,000 100,000 250.000 150,000